Why is the Chinese economy slowing down and could it get worse?

HONG KONG, Sept. 1 (Reuters) – China’s economic growth is slowing as policymakers try to fix a slowdown in the property market, with a focus on problems at major property developer Country Garden. Concerns are growing about whether the world’s second-largest economy is approaching crisis point:

What is causing the economic slowdown in China?

Unlike consumers in the West, Chinese people have been largely left to fend for themselves during the Covid-19 pandemic, and the retaliatory spending spree that some economists predicted after China reopened has not happened.

Moreover, demand for Chinese exports has declined as major trading partners suffer from rising costs of living.

With 70% of Chinese household wealth tied to real estate, the significant slowdown in this sector is spreading to other parts of the economy.

There have been major concerns about China’s economy before. Is this time different?

Alarm bells about the economy rang during the global financial crisis of 2008-2009 and during the capital outflow panic of 2015. China revived confidence then by shockingly boosting infrastructure investment and by encouraging speculation in the real estate market, Among other measures.

But infrastructure modernization created large amounts of debt, and the real estate bubble burst, which poses risks to financial stability today.

As China’s debt-fuelled investment in infrastructure and real estate peaks and exports slow in line with the global economy, China has only one other source of demand to adjust: household consumption.

In this sense, this slowdown is different.

China’s ability to recover depends largely on its ability to persuade households to spend more and save less, and whether it is able to do this to the extent that consumer demand makes up for weaknesses elsewhere in the economy.

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Why is low household spending a problem?

Household consumption, as a share of GDP, was among the lowest in the world even before Covid-19, with economists describing it as a major structural imbalance in an economy that relies heavily on debt-fueled investment.

Economists blame weak domestic demand for a decline in private sector investment appetite and for China’s slide into recession in July. If deflation continues, it could exacerbate the economic slowdown and deepen debt problems.

The imbalance between consumption and investment is deeper than it was in Japan before it entered the “lost decade” of recession in the 1990s.

Household spending in China as a proportion of GDP lags behind that of most other countries.

Will China’s economic slowdown get worse?

The weak data readings prompted some economists to point to the risk that China may find it difficult to achieve its economic growth target of about 5% for 2023 without more government spending.

A growth rate of about 5% is still much higher than many other major economies would achieve, but for a country that invests nearly 40% of its gross domestic product each year — about twice as much as the United States — economists say that number It remains disappointing.

There is also uncertainty about the government’s appetite for significant fiscal stimulus, given high levels of municipal debt.

China’s debt was 3 times GDP in 2022

The pressure in the real estate market, which accounts for about a quarter of economic activity, raises further concerns about the ability of policymakers to halt the decline in growth.

Some economists warn that investors will have to get used to much lower growth. A minority of them even raise the possibility of a recession similar to the one that occurred in Japan.

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Real estate sector performance from January to July

But other economists say many consumers and small businesses may already be feeling as deep economic pain as they did during the recession, given youth unemployment rates above 21% and deflationary pressures weighing on profit margins.

Will lowering interest rates help?

Major Chinese banks on Friday cut interest rates on a range of yuan deposits, to ease pressure on their margins and make room for them to lower lending costs for borrowers, including by lowering mortgage rates.

While policymakers hope lower interest rates will boost consumption, economists warn that accompanying deposit rate cuts shift money from consumers who save to those who borrow. Resource transfers from the government sector to households would have a more pronounced impact in the long run.

Lowering interest rates could also create risks of yuan depreciation and capital outflows, which China will be keen to avoid.

China’s central bank said on Friday it will reduce the amount of foreign exchange financial institutions must hold in reserves for the first time this year to counter pressure on the yuan.

What more can the Chinese government do?

Economists want to see measures that would boost the share of household consumption in GDP.

Options include government-funded consumer vouchers, deep tax cuts, encouraging faster wage growth, and building a social safety net with higher pensions, unemployment benefits, and better and more widely available public services.

No such steps were indicated at a recent meeting of the Communist Party leadership, but economists are looking forward to a major party congress in December for deeper structural reforms.

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Reported by Marius Zaharia. Edited by Robert Bircell and Neil Volek

Our standards: Thomson Reuters Principles of Trust.

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